The Alchemy of Finance Review
The latest in the Two Blokes Trading series of classic trading book reviews; The Alchemy of Finance
Author: George Soros
Subject: Economic Theory and Macro Investing
Audiobook: 2hrs 51 mins (abridged)
First Published: 1987
Who’s it for: Macro Investors, economists, anyone who wants to learn from the best
Reputation: A seminal work that was controversial at the time
The Good: When someone this successful speaks, you should listen
The Bad: Not that much actionable advice; his views now commonly understood
Recommendation: If you want to be a macro investor then you should read it, otherwise only do so if you like philosophy and blue sky thinking!
George Soros – Alchemy of Finance Review – Introduction
George Soros’s Alchemy of Finance is a frankly bizarre book. It is a book that contains more than it’s fair share of wisdom and a few bits of actionable investing advice, but also more than a little of Soros’ own particular life philosophy. Soros seems like he’d be the first to acknowledge that writing this book was a personal indulgence, and indeed he admits within its pages to being prone to oversharing.
It is clear that his first love is academics – philosophy in particular – and that finance is a secondary activity that enabled him to both make his fortune and have a pragmatic outlet for his personal universal-theory philosophies.
Alchemy of Finance Review – Reflexivity
At the heart of this book is his theory of ‘reflexivity’. It is the theory that market participants both react to and cause market events. He applies the theory to the wider world – that participants in all scenarios form and are formed by these very scenarios. As for the financial scenario, he uses his ideas to disabuse his readers of both the ‘efficient markets’ and ‘random walk’ ideas. In the markets, Soros says, ‘reflexivity’ is what causes self-reinforcing phenomena.
Soros believes that when a market participant acts he he will never act with perfect knowledge or rationality like the good little economic automaton that traditional economists believed he would. His actions are built on his expectations of future price movements, and those future price movements are dependent on his actions. It is this feedback loop that Soros suggests had been ignored by classical economists until the time of his writing.
Some of the originality of the work seems lost in the modern world of Freakonomics style behavioural economics, but it was surely more original when first published in the 1980s.
For anyone who takes a macro approach to the markets it seems to me that it would be essential to formulate a ‘world view’ of economic theory, otherwise how can one create a framework for deciding whether markets will go up or down?
Soros’ world-view has enabled him to make many billions playing the markets – he lays his success squarely at the feet of his philosophical outlook. Perhaps his ideas will help to inform your own philosophy as a macro investor. Perhaps not. Either way, this was a seminal work of its time and helped inform many of the macro investors currently operating in the market.
Alchemy of Finance Review – Conclusion
George Soros is undeniably a super hero when it comes to investing – as Paul Tudor Jones II wrote in his Foreword to the second edition, ‘his investment record is the most unimpeachable refutation of the random walk hypothesis ever’. For that reason alone, if you are serious about macro investing and in learning your craft, then you should read this book.
However, the ideas in this book, thirty years after they were first written down, now suffer from a feeling of unoriginality – even if they were original thoughts when first published! After the crash of 2008, most people would accept that financial phenomena can be self-reinforcing. The concepts of behavioural economics and inefficient markets have gained so much traction and exposure that maybe there is little new to be learned from reading this book.
But, it always good to learn from the master, so I would still recommend picking it up. Unless you are a serious macro investor, however, I’d probably recommend the audiobook at less than three hours, rather than the almost four hundred page written version…